Why we won't have income splitting

Summary: Showing through the example of income splitting how governments feel forced down a certain path regardless of the broader social consequences.

Various observers have suggested that income splitting would be a way to restore financial incentives for families to stick together. eg. Andrew Dolphin and The Family Electoral Lobby.

Basically the question is, who should pay more tax:

• A couple where one stays home and one works.
• A working couple with an equivalent combined income.

For example, a couple where the husband makes $80,000 and wife stays at home, pay about $25,000 in income tax. Another couple both working who have a combined income of $80,000 would pay about $16,500 in tax. If we had income splitting then both couples would pay the same amount of tax.

Supporters of income splitting say having a husband work and wife look after the home (or vice versa) is a less stressful arrangement, gives everyone something to do, and leaves jobs available for single people. So it should be supported by the government.

Others say it's a bad idea for wives to be financially dependent on her husband - she may feel compelled to do as he says.

I say moral arguments over the issue probably don't influence the government at all, and it's this fact that people should focus on.

Everyone seems to agree that income splitting would discourage some married women from participating in the workforce. (Just imagine a woman starting part-time work where her husband earns $60,000 a year - she would be pay half of every cent she earned on income tax!)

So what would happen if income splitting were introduced?

A number of two income families would decide that one spouse should give up her job.

What would happen then?

We'd have a recession.

And who would be blamed for the recession?

The government.

And not many governments will cause recessions and get re-elected.

Real or Statistical recession?

The Minister assisting the Prime Minister for the status of Women recently bragged that 55% of women were now participating in the workforce. Many of these women would be married, which is a lot of people to be encouraging out of work.

Imagine a husband and wife both working, husband making $50,000 per year, wife $30,000. Income splitting is introduced and the wife decides she doesn't want to work if it means that she pays $13,000 in tax in addition to work related expenses and child-care expenses. She gives up her job.

Now the economists will have a fit. Australia's economy as represented by this family has just shrunk by about 40%! Of course not every woman is married and not every married woman would give up her job, but nonetheless there would be a very big reduction in the size of the economy. The only question is, would this be a real recession or a purely statisticial one?

It seems to me that this would be a real recession and a deep one. When the wife gives up her $30,000 a year job she doesn't have the money to spend on childcare (doesn't need it anyway), housekeeper (doesn't need one), so there's less work for child-care and home-help workers. She might not be able to justify having a second family car, so there's less work in the car industry.

Maybe the wife would be bored at home and she'd end up doing part-time volunteer work but this doesn't count as contributing to Australia's economy.

Some people may be scratching their heads here, asking how can it be if a woman quits her job to stay at home looking after the house, kids, and doing some volunteer work - isn't that just substituting one form of work for another? Why would that entail a recession?

There are at least three reasons:

• She wouldn't have to work as hard at home.
• There would be a cost as people left their jobs and needed to be retrained in new industries (eg. child care workers learning how to fry hamburgers).
• She wouldn't be paid in dollars, and economists find it hard to measure anything else.

Points 1 and 3 are related and raise a fundamental point. Imagine a man and wife divorce, each moving into their own house, buying their own furniture, paying separate bills for home heating and cooking. The economists are carefully counting the expenditure and deciding that this is economic growth. But are the couple happier? Who measures happiness?

The recession would be a period in which various industries would contract as they adjusted to the fact that more wives were staying at home and they weren't spending the money they used to.

Maybe we'd be better off with income splitting, but can we face the intervening pain? Many years ago Edward de Bono coined the term "Hump Effect" to indicate an obstacle that blocks people from venturing to the greener grass beyond. It seems that income splitting is just such a hump.

The dark side

If encouraging married women to give up their jobs would cause a recession, how much of our "economic growth" in the last couple of decades can be ascribed to womens' increase participation in the workforce?

What if politicians have decided to push married women into the workforce just so that they can get the credit for "growing the economy"?

Clearly we need more from our political system if we are to have any hope of a bright future.

Phil Bachmann nmt
12-Sep-01